Majority shareholders in a California C corporation came to Acuity looking for a sale transaction that was challenged by their own conflicting goals and objectives. They had unsuccessfully brought the company to market two years earlier with those same goals. What did our team do differently? We exceeded their expectations.
CMRE provides revenue cycle management services to various healthcare providers, including hospitals and physician groups. This California C corporation had over 400 employees, approximately $45 million in revenue and four shareholders comprising 70% of the ownership. Ten other shareholders held the remaining shares.
Goals and Challenges
The majority shareholders were seeking a valuation above a minimum threshold. They wanted a structure that could enable some of the sellers to retire quickly, while simultaneously not requiring other sellers to reinvest, or “roll” any meaningful portion of their sale proceeds. At the same time, all sellers wanted to maximize the proceeds at closing, while minimizing any long-term exposure post-transaction.
The Company had several years of modest growth, followed by one year that far exceeded any prior years’ performance. Several clients represented more than 10% of revenue. One of them had brought in non-recurring revenue on a project that significantly contributed to that latest year’s higher profit. The shareholders were seeking a valuation based on a belief that their best year would recur. But during the process, they lost that key customer. Profit declined significantly as a result. The sellers continued to believe that the performance would recover and sought a valuation based on expected profits rather than the recent unfavorable trend.
Given their C Corporation tax status, the transaction had to be structured as a stock sale to avoid corporate tax. It also had to bring maximum cash at closing to satisfy the four key shareholders’ competing objectives.
We developed a go-to-market strategy and the requisite marketing materials, and conducted a rigorous auction process. We successfully articulated the key aspects of the transaction that the right buyer would agree to. The result was eight potential suitors, most of whom were either private equity / buyout funds, or companies in the industry backed by such groups.
After facilitating management presentations with four groups, we negotiated key transaction terms with each of the parties. The sellers reached an agreement in principle and signed a letter of intent with the eventual buyer. They immediately entered into due diligence.
We then worked with the management team to overcome numerous material issues in diligence. After working through protracted contract renegotiations with the company’s largest customer, unexpected litigation, and obscure state tax issues, we successfully closed the transaction on substantially similar terms as the letter of intent.
The stock was sold to a private equity-backed strategic buyer at an up-front valuation that exceeded the sellers’ initial expectations by 16%. In addition, we negotiated a favorable earnout structure that could result in an additional payment of up to 19% of the upfront purchase price approximately 16 months after closing.
While equity rollover components of 10 to 20% are common for these types of transactions, we were able to negotiate an equity roll of only 6.4%. That freed up significantly more cash to be paid to the sellers at closing.
We successfully negotiated employment agreements for several key members of the senior management team, with compensation at or above market levels and significant components guaranteed by the buyer. Lastly, we were able to incorporate a buy-side representation and warranty insurance policy at a reasonable premium cost to further insulate the sellers from unforeseen exposure down the road.
Preparation, persistence, and constant communication enabled us to close the transaction despite numerous obstacles. Selling a company is a complex and highly emotional process best undertaken with the guidance, advice, and experience of a trusted advisor in your corner. There are many possible outcomes to a transaction with this degree of complexity. Acuity Advisors helped the sellers of CMRE get to the right result.